The gratuity formula (15/26): what your years of service are worth

Gratuity is the one part of your pay that grows with loyalty. It is a lump sum your employer pays when you leave, and it depends on only two numbers: your last drawn salary and how long you stayed.

The formula in plain words

A part year of more than six months is rounded up to the next full year. So 7 years and 8 months counts as 8 years, while 7 years and 5 months counts as 7.

Worked example

What people get wrong

• Using CTC. Only basic and DA count. A big CTC with a small basic means a small gratuity.
• Counting years that were not continuous. A real break in service can reset the clock.
• Assuming everyone gets it. The formula above applies to employees covered by the Payment of Gratuity Act. Employers not covered by the Act may use their own terms.
• Forgetting the five-year rule. There are exceptions, such as death or disablement, but resigning at 4 years 10 months normally means no gratuity.
• Forgetting the cap and tax rules. There is a legal ceiling on gratuity and a tax-free limit. Both are set by the government and have been revised before, so check the current figures.

Gratuity is one piece of your retirement and exit money. Compare it with what you build yourself in a monthly SIP, where years of habit do the same quiet work.